There have been 14 days of intense military exchanges between the US, Israel and Iran. During this period, benchmark indices Nifty and Sensex each fell more than 5%, while crude oil, the world’s most important commodity, crossed the $100 mark, roiling global markets. Traditionally, such conditions support precious metals.
However, this pattern is not done this time. Silver fell over Rs 14,000 on the multi-commodity exchange, down about 5%, while gold also edged lower.
Recent declines, despite the outbreak of war, may be counterintuitive, as the precious metal is generally seen as a safe haven during geopolitical turmoil. However, current market dynamics are shaped by many interacting factors.
First, a sharp rise in crude oil prices and geopolitical tensions have created a sense of greater risk aversion at the outset, prompting investors to raise cash and reduce leveraged positions in asset classes. In such phases, even traditional safe-haven assets like gold can face short-term selling pressure as investors liquidate assets to meet margin calls or rebalance portfolios, said Ponmudi R, CEO of Enrich Money.
Second, the strength of the US dollar has played an important role. In times of global uncertainty, capital often moves to the dollar and US Treasuries. It is generally weighted in precious metals because they are priced in dollars. The Indian rupee weakened past the 92.3475 mark against the US dollar, hitting a new all-time low on Thursday.
Third, profit booking after a strong rally in gold earlier this year and into 2025 also contributed to the decline. With prices already at high levels, some investors chose to lock in gains in case of increased volatility. Ponmudi suggests that the recent weakness looks like a short-term correction rather than a structural change in the structure of long-term demand for precious metals as a safe haven.
Jigar Trivedi of IndusInd Securities also pointed out, suggesting that the current scenario is different as crude oil has a direct correlation with inflation. Higher oil prices tend to raise inflation, which could negatively impact the economy and force the US Federal Reserve to reevaluate its policy stance.
Currently, the US Fed closely monitors two key economic indicators, employment and inflation. The central bank intends to keep inflation close to the 2% mark for the medium term. Rising crude oil prices may make it more difficult to achieve this goal.
A strong dollar usually puts pressure on gold prices. During times of conflict or uncertainty, investors often turn to U.S. dollars and U.S. Treasury bonds for safety and liquidity. Since gold is denominated in dollars, a strong greenback makes the metal more expensive for buyers using other currencies, which also reduces demand.
He added that once the war premium subsides, investors are likely to turn their attention back to fundamentals such as monetary policy, the dollar index, and central bank purchases.
What should your strategy be?
“We reiterate investment in gold given supportive fundamentals and market uncertainty. Any reduction in rates or easing in tensions compared to falling dollar provides an opportunity to accumulate/invest in gold,” Tata Mutual Fund said in a report.
Corrections after strong rallies are natural and do not undermine the long-term bullish outlook for the precious metal. He added that the structural factors that support gold largely remain.
Geopolitical fragmentation continues in many regions, reinforcing gold’s role as a hedge of international debt. In addition, structural supply constraints are limiting the availability of fresh metals, while central bank purchases remain strong as countries diversify reserves away from fiat currencies. International central bank gold purchases have nearly doubled over the past decade.
For silver, which has fallen by around Rs 14,000 or 5% since the conflict began, geo-economic conditions, along with structural and cyclical fundamentals, may continue to support prices. Investors may be wary of declines, especially given the broadly supportive backdrop for precious metals, the report added. Silver, in particular, remains a growth story, with its outlook closely tied to a broader recovery in industrial demand. Given the inherent volatility in commodities, a shock investment approach may be appropriate for those looking for medium to long-term exposure.
((rejection: The recommendations, suggestions, opinions and views given by the experts are their own. (It does not represent the views of The Economic Times.)
